Most investors are always looking to find value in the share market, and though every investor has their own way of picking “hot stocks”, I’m going to have a quick look into a couple of simple and popular ways of looking for value in companies.
These are the Earnings Per Share (EPS) figure and the Price to Earnings Ratio (PER or P/E ratio). As the P/E ratio of a share is dependent on the EPS I will start by explaining the EPS.
In theory this is how much share of a company’s profits you have. It is calculated by taking the after tax profit for a company and dividing it by the number of shares on issue. Another good measure of how a company is performing is to analyse the EPS growth from year to year.
The P/E ratio often then used to determine how “cheap” a share is. This is calculated by dividing the share price by the EPS. This, in theory, gives the earning power of a share relative to its share price. Shares with extraordinarily low P/E ratios are often considered to be undervalued (or in trouble!) and shares with extraordinary high P/E ratios are often considered to be overpriced. Usually, you would compare the P/E ratio for a company to other similarly-sized companies in the same industry.
Note these figures are theoretical measures only and they do not necessarily determine how a share will perform. This is a site that can be quite useful for company analysis if you are looking for one, but there are many more out there.